Annual International Bar Association Conference Boston, Massachusetts. Recent Developments in International Taxation. Perú.

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1 Annual International Bar Association Conference 2013 Boston, Massachusetts Recent Developments in International Taxation Perú Carlos Bernal Payet, Rey, Cauvi, Perez y Mur Abogados. cbe@prc.com.pe [NTD - Current draft covers developments through April 15, 2013 final draft to cover period through July 1, 2013]

2 1. RECENT HIGHLIGHTS The most significant Peruvian developments in the past year have been the modification in the application of transfer costs, the introduction of the CFC legislation, general antiavoidance rules and the precision of technical assistance concepts, tax audit/examination and exports in regards of the IVA. TRANSACTION COSTS Since 2001, the Income Tax Law provides rules on transfer pricing, on a general basis. Decree Legislative 1112, dated of June 29, 2012, established the application of the transaction costs, leaving aside the previous regulations which established that transaction costs would be applicable when the agreed valuation would have resulted in the payment of a lower Tax Income rate than the one that would have resulted when applying the fair value in the country. Nowadays, the general criteria consists in transactions undertaken between related parties or transactions carried out by means of or through low-tax jurisdictions must be at a value that unrelated parties in comparable transactions and similar conditions would have agreed. Within this framework, the OECD Transfer Pricing Guidelines are used when applying and interpreting this regime, as long as the Guidelines do not contradict the regime. CONTROLLED FOREIGN COMPANY Before the controlled foreign corporation (CFC) legislation which recently entered in force, a Peruvian domiciled person could avoid recognizing the worldwide-source income earned or perceived abroad through using a non-domiciled subsidiary. In that sense, the income obtained by the subsidiary may only be affected in Peru until its distribution as dividends or shared liberated in favor of the shareholders. Therefore, Legislative Decree 1120 of 18 July 2012, has introduced the anti-avoidance rules in order to prevent the erosion of the national income taxable basis and to discourage capital relocation to jurisdiction with low or non existent imposition. Subject to the enactment of regulations, the new rules are as follows: The CFC rules have entered into force on January 1, These rules would be applicable to domiciled individuals and companies who control foreign legal entities, with respect to passive income obtained by the CFC, provided the taxpayers are subject to income tax in Peru over foreign source passive income. A CFC is defined as any entity of whatever nature non-domiciled in the country, which meets the following requirements: a) It has a legal personality independent from its partners, associates, members or owners;

3 b) In which its passive income is not subject to the Income Tax, whichever the denomination for such tribute is, or in such case, the tax results equal or less than 75% of the tax that would correspond to the same income in Peru. c) It is owned by a Peruvian domiciled (individual or corporate) taxpayer. It is deemed that a foreign entity is owned by a Peruvian taxpayer when the latter has a direct or indirect interest, by himself or together with related parties domiciled in Peru, of 50% or more in the capital or revenues or voting rights of the CFC. The Peruvian domiciled taxpayer must include as taxable income at the end of the fiscal year any dividends, interest, royalties, and capital gains obtained by the CFC, being irrelevant if said passive income has been effectively distributed by the CFC. The income attribution regime does not include passive income already taxed in Peru as Peruvian sourced income. Likewise, the tax already paid abroad by the CFC will be a credit for the Peruvian taxpayer. GENERAL ANTI-AVOIDANCE RULES Decree Legislative 1121 of 18 July 2012 introduced, through provision XVI of the Tax Code s preliminary title, a regulation against the tax evasion. In this regard, the national Tax Administration has been granted authority to claim a tax debt or reduce the amount of deductions or credits in favor of the taxpayer, in the event the administration detects tax evasion. Moreover, the Peruvian Tax Authority would apply the regulation that would correspond to the usual procedures, when the taxable act partially or entirely evaded or when the imputable source or tax debt is reduced or when deductions, tax losses or credits for tax are generated. TECHNICAL ASSISTANCE Non-domiciled companies supplying technical assistance services within Peru or abroad are subject to withholding tax at the rate of 15%, provided that the services are used in Peru. In said sense, the Peruvian Income Tax Law requested that the legal user of the quoted services needed to obtain and submit to the Peruvian Tax Authority a sworn declaration expedited by the non domiciled company declaring that the service was provided, as well as a report by a prestigious international auditing firm certifying that the technical assistance has been provided effectively. However, Legislative Decree 1120 of 18 July 2012 has suppressed the presentation of a sworn declaration; also, the aforementioned rule has established that the taxpayer must obtain and provide the Peruvian Tax Authority with a report from a prestigious international auditing firm domiciled in the country in which the report states that the

4 technical assistance services were rendered provided that the consideration for the technical assistance services exceeds US$ 200,000. TAX AUDIT/EXAMINATION Tax Administration is entitled to investigate the correctness of a corporate taxpayer's tax return, accounts or self-assessment calculations, including a complete and exhaustive audit of the taxpayer's books. Tax audits are carried out either in special circumstances and for particular purposes, or as a matter of routine, although not necessarily for every taxpayer in every tax period. However, according to Legislative Decree 1113 of July 5, 2012, the control by the Peruvian Tax Authority may be definitive or partial. The control will be partial when only part, one or some elements of the tax obligation is investigated. Once the partial control has begun, the Peruvian Tax Authority - SUNAT may expand it to other issues that were not considered initially. EXEMPTIONS Exports of goods and services are 0% rated. Transactions treated as exports of services are listed in Appendix V to the VAT Law. Under Law 29,646, published in the Official Gazette of 1 January 2011, with effect from 2 January 2011, these services are classified in categories, inter alia, foreign commerce (including consulting, insurance, financing, marketing services, and the supply of technical assistance) and services for consumption within Peru. The list may be amended by supreme decree. However, the absence of a definition for exportation in the IVA Law, generated different interpretations from the Peruvian Tax Administration, the Tax Tribunal and the taxpayers, regarding what to consider exportation and in which moment would it be configured as such for IVA effects, a problem that intensified in the case of international sales agreed in Exwork terms, in which it was discussed if the transfer of goods is carried out in the country or outside of it, generating a common sales operation and another of exonerated IVA exportation respectively. In that sense, Legislative Decree 1119 of July 2012, has established that the sale of goods by a resident individual to a non-resident individual, regardless whether the transaction is carried out in or out of the country, will be considered an exportation, as long as the definitive exportation is carried out within 60 calendar days from the day the invoice was generated. If documents issued by a customs warehouse are involved, the shipment must be done in less than 240 calendar days as of the date in which the customs warehouse issued the documents. Additionally, sales from an international acquisition contract, regulated under incoterm EXW, FCA or FAS rules will also be considered as exportation, if the seller conducts the exportation and no documents have been issued by a customs warehouse or deposit warehouse.

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